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08 August 2019

The unemployment insurance helps − but only when the decision-making powers are relinquished.

Hardly any founder wastes much thought in the early phase of a startup on what might come after but when the project advances and becomes more and more demanding, the moment comes when the founders have to put all their eggs in one basket. The position with their current employer is terminated and all efforts are put into the startup. Especially younger founders without a financial cushion and founders with families wonder if they will get unemployment benefits after leaving the startup if they don't find a new job right away.

Those who have not yet founded their startup or who run a startup as a sole proprietorship or general partnership are not obliged to pay any contributions to the unemployment insurance fund. This means that over time, one of the main prerequisites for claiming unemployment benefits is no longer met: the payment of contributions. If a founder has worked continuously for at least one year before, he or she will be excluded from receiving unemployment benefits after one year of working for the startup without paying contributions. It is therefore advisable holding a careful review after 11 months. If the startup is not successful, it appears more reasonable to give up the project as long as there is still the possibility of claiming unemployment benefits, rather than coming to the same conclusion after 13 months.

Many founders therefore decide to found an AG or a GmbH and hire themselves as employees of the startup. Problem solved, right? Not quite, unfortunately. Founders, who are employed by their own startup, face a number of other hurdles that need to be overcome in order to receive unemployment benefits. The same also applies to the members of the management of the startup (CEO, managing director, etc.).

General requirements for receiving unemployment benefits

The entitlement to unemployment benefits is governed by the Swiss Federal Unemployment Insurance Act (AVIG) and its corresponding ordinance (AVIV).

In addition to the basic requirement of a total or partial unemployment, the entitlement is subject to a number of other requirements:

  • The unemployment must result in an corresponding loss of earnings
  • Contributions must have been paid during at least 12 months within a 2-year timeframe before registration
  • The applicant must be fit for placement (i.e. be willing, able and allowed to take up a new job)
  • The instructions of the unemployment agency for job placement must be followed (i.e. the applicant must actively search for a new job and accept every reasonable offer for placement).

Problem of "employer-like status"

However, it is not enough for the founders or members of the management of a startup to only meet these general requirements. What many see as the fulfillment of a dream when founding the startup, i.e. finally being their own boss, becomes a problem.

According to the law, so-called "persons with an employer-like status" are precluded from receiving unemployment benefits. This is justified by the risk of a misuse of benefits, because such persons have such far-reaching decision-making powers within the company that they can in fact decide upon their own dismissal or continued employment.

Categories of employer-like persons

In practice, an employer-like position is assumed, in particular, in the following cases:

  • Members of the board of directors of an AG / shareholders of a GmbH
    Members of the board of directors of an AG and shareholders of a GmbH already have significant decision-making powers in the business as a matter of law. As long as such a position is being maintained even after termination of the employment relationship or a reduction in the capacity of employment with the startup, an entitlement to unemployment benefits is categorically denied without further examination.
  • Members of the highest operational decision-making body
    An applicant may also be precluded from receiving unemployment benefits if he or she, when registering with the unemployment insurance, continues to be a member of the company's top executive management, even without being a member of the board of directors of an AG or a shareholder of a GmbH, respectively. In practice, in each individual case the effective organizational structures and the actual circumstances within the company are decisive.
  • Significant financial participation
    In accordance with the principle of "the one who pays, commands", employer-like powers may also vest in a person due to a significant financial participation in the company. This is assumed where such a financial participation results in the possibility to significantly influence the decisions of the company's shareholders. The Swiss Federal Supreme Court, for example, affirmed this in case of an applicant with a 40% shareholding in the company, whereby the other 2 co-shareholders each owned a shareholding of 30%.

However, the mere ownership of shares or interests (e.g. employee shares or a minority interest for investment purposes) in the company per se does not preclude an applicant from receiving unemployment benefits. In practice, however, it is required that the financial participation does not allow the applicant to influence the company's decisions in a concrete and significant way due to the actual circumstances of the individual case (i.e. the number and structure of the shareholders). As a rule of thumb, a shareholding in the company should ideally be less than 30%, but in any case less than 50%.

In determining whether the founders or the members of the management of the startup in fact have an employer-like status, the unemployment insurance authorities may rely, inter alia, on the following documents and evidence:

  • Excerpt of the commercial register (incl. signatory powers)
  • Articles of Association of the company
  • Minutes of the foundation; minutes of general assemblies of the shareholders
  • Minutes of meetings of the board of directors or the management
  • Employment, consultancy and shareholders' agreements
  • Organizational charts and regulations
  • Questioning of the founders/members of the management of the startup as to the effective distribution of responsibilities and actual decision-making process within the company
  • Tax declarations (to check the financial participation in the company).

Impact of a non-compete clause on the entitlement to unemployment benefits?

In practice, the members of the management or the founders of a startup regularly agree on a post-contractual non-compete clause in their employment contracts or in a shareholders' agreement, which makes it more difficult to find a new position in the previous or similar profession or industry sector after leaving the startup.

Such a non-compete, however, does not relieve the applicant of the statutory obligation to undertake all reasonable steps to avoid unemployment. This means that the members of the management or the founders of the startup must accept, if necessary temporarily, any reasonable new position, even outside their previous profession or field of activity and even if this is associated with a much lower salary. If a reasonable new job is rejected, the entitlement to unemployment benefits is reduced significantly.

Summary

If the founders and the members of the management have to give up or reduce their activities for the startup, they are entitled to claim unemployment benefits, but only if they:

  • Are no longer members of the board of directors of the AG or shareholders of the GmbH
  • Do not otherwise have far-reaching decision-making powers within the company (e.g. as a member of the management, as a consultant etc.)
  • Do not hold a significant financial participation in the company (i.e. they ideally have a shareholding of less than 30%, but in any case less than 50%).

If the founders or the members of the management of the startup are subject to a non-compete clause after the termination for their employment with the startup, they are required to accept any reasonable new position, even outside their profession or previous field of activity, even if this results in a noticeable loss of income. Rejecting a reasonable new job would result in a substantial reduction in their entitlement to unemployment benefits.

Our Startup Desk or our Employment Team is happy to answer any further questions you may have..

Authors: Christian Wyss, Florian Schaub

Topics: Start-upNon-compete ClauseEmployment LawUnemployment BenefitsEmployer-like StatusSocial Insurances

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